America’s Eclipse and other optical effects

To measure power in today’s globalised world, old, national-economy indices are wholly inadequate.

The chronicle of American power’s demise has been foretold many times. The retelling in fashion these days is Arvind Subramanian’s Eclipse: Living in the Shadow of China’s Economic Dominance. The title is apt, though: the prognosis of China overtaking the US by 2030 is an optical effect, not real, just as an eclipse of the moon or the sun is a transient optical effect rather than permanent occlusion. The Eclipse thesis assumes that power derives from three things: the size of the gross domestic product, the magnitude of trade, and the extent to which a country is a net creditor to the rest of the world. Military strength is treated as a derivative of GDP.

The primary thing wrong with this model is the use of GDP as a wholly representative measure of economic strength. This would have been all right some time back, but not in these days of globalised growth. A nation’s economic power depends on the production its nationals command, not on the production carried out within its borders.

The US is home to the largest number of the world’s multinational companies. (Forget transnational . However transnational they might look, there would be a national government to which they run crying, when they run into a political problem they cannot tackle themselves. So, these ‘transnationals’ are multinationals owing allegiance to the nation whose government is their final protector.) These multinational companies contribute to the GDP of other countries, where they locate their production , such as China, rather than to their own. Conventional national income accounting fails to capture the economic power commanded by a nation’s companies that operate abroad. California-based Apple does the product design, engineering , technology development and marketing for its popular products. These are manufactured in Taiwan and China and shipped around the world. China’s exports worth billions of dollars of Apple products show up as China’s GDP, but in reality, very little of that value accrues to China for its manufacturing services .

The bulk of the value is captured by Apple. If Apple chooses to repatriate its profits wholly back to the US, these will figure in US gross national product, which is GDP adjusted for net payments abroad on account of capital and labour. However, US tax laws not only do not compel Apple (or other American multinationals) to repatriate their profits, royalty earnings, etc, back to the US but also offer incentives to keep their money in some lowtax location abroad. What this means is that American multinational profits that are not kicked back to shareholders will not show up in US national income accounting at all. Globalised business also makes a country’s trade an imprecise measure of its economic vitality. America’s oil giants partner Middle-Eastern national oil companies. Oil trade from the Middle East spans the globe.

Only the fraction that goes to the US would figure in Arvind Subramanian’s measure of national power, whereas all oil exports from the Middle East add to the power of America’s oil giants. Trade by multinational companies is a large part of global trade. Some of their transborder trade is intra-firm trade, making for one more difficulty in straightforward use of trade as a good proxy of national might. The third leg of Eclipse’s index of power is the degree to which a country is a creditor to other countries. This sounds plausible, until you realise what the world’s greatest debtor nation, the US, has done with its debt: a large part of the money that the rest of the world has so generously lent to the US has been recycled back as private equity, venture funds, hedge funds or corporate war-chest to allow transfer of ownership of productive assets in these very lenders to American entities. If I lend you money, I might think I have leverage over you; but if I lend you enough money for you to buy out my home, you have leverage over me.

An index of power suited more for the world of national economies that most economists are comfortable with than for today’s world of globalised economic activity is not the only problem with Eclipse. It also sadly underestimates four key determinants of power: the ability to innovate technology, cultural influence — soft power , so to speak — the gap between current levels of national military technology and the ability to muster and lead international coalitions. In all these, the US is today far ahead of all other countries. US universities are powerhouses of fundamental research, advances in which translate into technological breakthroughs. China will take generations to catch up, although they are on the job.

American films, television programming, music, games, food, fiction and clothes mould the lives and aspirations of young people everywhere , including in China. American companies — Google , Apple, Facebook, Coke — permeate their lives. American military power is unrivalled. Advances in electromagnetic weaponry that can take out the electronic brains of enemy weapons systems , including ships, planes and missiles, hold out the threat of lasting American superiority. The US can persuade a host of other countries to fund and man the wars it initiates.

The only country that China can readily marshal to its side is Pakistan. If the US can persuade Israel to stop pretending that the US still needs Israel to play regional bully, it will suddenly find a sea-change in its global appeal as well. All those in charge of longterm strategy are strongly advised to not hold their breath for an imminent change in the global power pecking order.